by Dan Rafter
The best word to describe the commercial real estate market in Lexington, Kentucky? Steady.
Consider the latest research from Lexington’s NAI Isaac. According to the company’s mid-year commercial real estate report, the retail vacancy rate in the Lexington market stood at 4.75 percent as of the middle of 2016. The suburban office market’s vacancy rate was 16.12 percent, while that number was 13.46 percent in the Central Business District.
The area’s industrial market is particularly strong, with the vacancy rate here standing at 6.42 percent as of the middle of the year.
These are all solid numbers, and are evidence that the Lexington commercial real estate market deserves that “steady” adjective.
“In general, the Lexington market is doing really well,” said Al Isaac, president of NAI Isaac. “The area has interested developers. There are plans for some significant new retail developments in the area. We will be seeing the entrance in our market of retailers and restaurants that haven’t previously done business in the Lexington market.”
A lot of legs
Why has Lexington remained such a stable market? Isaac points to the area’s diverse economy. Lexington doesn’t rely on just one industry. Instead, a diverse array of companies and industries helps to power the economy here.
As Isaac says, the Lexington economy has “a lot of different legs to it.”
The University of Kentucky helps, too. The college brings thousands of students to Lexington each year. Many of these students stay in the area once they graduate. That helps provide a highly educated population base from which companies can choose when they’re making hiring decisions.
Lexington’s location is another boon. The city is located in the center of the country and boasts a strong interstate system. It has the Blue Grass Airport in Fayette County that offers direct flights to cities across the country.
“All of that helps make Lexington a strong area for companies and developers to target,” Isaac said.
And the market here is poised for a major retail addition. The Summit at Fritz Farm is a 300,000-square-foot mixed-use development scheduled to open on Nicholasville Road in Lexington.
This development will include more than 75 restaurants and retailers when it opens in the spring of 2017. Retailers that have already committed to the development include Whole Foods, Orvis, Brooks Brothers and Pottery Barn. That Pottery Barn will be the first to open in Lexington.
The development will also include apartments, a boutique hotel and office space.
Isaac expects big things from The Summit.
“This should be a really nice mixed-use development for the area,” Isaac said. “We think it’s going to be a strong addition to the community. And it should provide yet another boost to that already strong Nicholasville Road market.”
Another major development is the new headquarters being built by Ashland Oil. The oil company is building a 145,000-square-foot office building on its Lexington campus located between Blazer Parkway and Palumbo Drive. The new building will provide a home for Valvoline, a business unit of Ashland that has been based in Lexington for more than 30 years.
Completion of the $35 million development is expected to be in February of 2017.
Isaac said that the addition of this development will only provide yet another boost to a retail market that is already thriving. He said that quick-service restaurants and discount retailers are performing especially well in the Lexington region.
Industrial strong, but little spec development
There isn’t much available space in Lexington’s industrial market. But that hasn’t corresponded to an increase in industrial spec development, though Isaac says that he expects this to change soon.
For now, there isn’t much industrial land available for developers. Isaac said that community planners are now reviewing the industrial market to determine if it makes sense to extend some industrial zoning to more of the Lexington market’s urban areas. That would free up more land for industrial developments.
Lexington is a strong industrial area, especially when it comes to distribution facilities. Interstates 75 and 64 provide easy access from Lexington to a large swath of the country, so it’s easy to get product into and out of Lexington. Online retail giant Amazon also has a strong presence here, which provides anther boost to the distribution market.
A lack of available land has also slowed the multifamily market a bit in the Lexington area, Isaac said.
“It all goes back to zoning,” he said. “It all goes back to how scarce land is for multifamily development of any sort of large size. There are not that many parcels of land available for new multifamily developments. We have seen some new apartment projects lease up rapidly. The vacancy rate in our multifamily developments is quite low today.”
The Lexington-area office market is a stable one, too. But Isaac says that the market is still reacting to the right-sizing moves being made by companies. Many office users continue to give up space as their employees spend more time working from remote locations.
“People are using less space, too, when they move to open-office concepts,” Isaac said. “That open layout allows companies to occupy less office space. We’re not sure, of course, what will happen with this trend. A lot of companies like that open layout. But we are hearing feedback from some companies that while they do want their office spaces to be more open, they also want some limits on it. For some companies, a completely open floor plan can be too disruptive. It will be interesting to see what the industry finally decides.”
What does Isaac think the future holds for Lexington? He sees a continuation of the steady commercial market that is already powering this area.
“I see activity in this market continuing at a solid pace,” Isaac said. “Even if we see small increases in the lending rates, I don’t see the occupancy levels in our different segments falling. There is a lot of investment money chasing commercial real estate in the Lexington market. That will continue as it has in the previous six months.”